By now all of you would have looked at a gazillion charts and tables trying to relate Nifty’s 10-20 year average PE and comparing that to where we are today. Naturally, we have been in a very very expensive market for far too long. Markets have been running up with no earnings support whatsover. At some point, the mismatch between earnings and stock prices will become right and if that happens anytime in the next 1 year, then we will see a significant decline from the current levels. I expect markets to fall gradually by another 10% before the end of FY 2020.

Click on the image below to expand. PE multiple is as it prevailed on the 1st of January of each year. Returns are Calendar year returns.

Look at the chart above, and notice

1. Between 2000 – 2009 period – the market went up by more than 35% in 5 out of 10 years and the PE multiple remained volatile.

2. 2010 – 2019 period – the market reamained flat. Not even once did they come close to generating 35% in a single calendar year. PE multiple remained continuously inflated and equally flat.

Just looking at this chart it becomes clear that for markets to rise in any meaningful way, the PE multiple has to fall. This can happen only if earnings improve drastically or if stock prices fall equally drastically. Or, if both happen gradually over a period of time. Market has been hoping for this last option for a few years.

Also See: Nifty 50 Earnings, Q1 FY 2020 Analysis

In any event whether or not earnings imprve or stock prices fall, one thing is clear:

While downside to this market remains heavy; in the prevailing environment of slowdown and global trade wars, it is hard to come up with reasons why this market should rise anytime soon. I do however believe that there is significant mismatch between lthe Nifty and the  midcap and small cap indices. In latter case, valuations falling close to or below thier average lows for the past 20 years. Though the average itself is higher given how long we have stayed overvalued.

Year	Nifty Opening Value	% Returns	Nifty P/E Multiple- 1 January
1999	886.75	67%	11.62
2000	1482.15	-15%	25.91
2001	1263.5	-16%	19.06
2002	1058.85	3%	15.29
2003	1093.6	72%	14.92
2004	1880.35	11%	21.09
2005	2080	36%	15.57
2006	2836.8	40%	17.16
2007	3966.25	55%	21.48
2008	6136.75	-52%	27.64
2009	2963.3	76%	13.3
2010	5200.9	19%	23.31
2011	6177.45	-25%	24.57
2012	4640.2	28%	16.79
2013	5937.65	7%	18.82
2014	6323.8	31%	18.69
2015	8272.8	-4%	21.16
2016	7938.45	3%	21.53
2017	8210.1	28%	22.08
2018	10531.7	3%	26.68
2019	10881.7	-0.84%	26.28

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